{"id":18198,"date":"2018-07-24T11:10:28","date_gmt":"2018-07-24T15:10:28","guid":{"rendered":"https:\/\/wealthbytes.co\/?p=18198"},"modified":"2018-07-24T11:10:28","modified_gmt":"2018-07-24T15:10:28","slug":"stay-out-of-debt-with-low-income","status":"publish","type":"post","link":"https:\/\/wealthbytes.co\/stay-out-of-debt-with-low-income\/","title":{"rendered":"How to Stay Out of Debt With a Low Income"},"content":{"rendered":"
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You don\u2019t make a lot of money and you\u2019ve worked hard to get out of debt<\/a>. Now that you have the taste of what it\u2019s like to not have a monthly interest payment for maybe the first time ever as an adult, the last thing you want to do is go back into debt. But, what\u2019s the best way to stay out of debt with a low income?<\/p>\n These tips can help you make a financial game plan to make you build wealth while staying out of the poorhouse.<\/p>\n While you won\u2019t become an “instant millionaire” you can still pay your bills, go on vacation, and save for the future\u2014three activities that probably caused you to lose sleep when you were still in debt.<\/p>\n If you\u2019re like most people with a small income, one of the only ways to find extra money each month is to reduce your monthly spending to the bone. That might mean not going out to eat, having a \u201cstaycation\u201d instead of a vacation this summer, and canceling your monthly subscriptions.<\/p>\n The only problem is that for most us is that we can only suppress our wants for so long. When you\u2019re debt-free and no longer sending your disposable income to make extra debt payments, the money in your pocket suddenly feels warmer than it did a month ago.<\/p>\n While you shouldn\u2019t go back to your old spending habits and \u201ckeeping up with the Joneses,\u201d it\u2019s expected to have some lifestyle inflation. As with every aspect of life, remember the mantra, “Everything in moderation.”<\/b><\/p>\n It\u2019s okay to increase some of your monthly subscription spending again, but don\u2019t overpay.<\/p>\n Some of the ways you can save money on the finer things in life include:<\/p>\n While you should never pay more than absolutely necessary, the three recommendations above are the easiest ways to get the same products you use now for less.<\/p>\n When you tackle your high-interest credit card debt, one of the next places you\u2019ll cut is your monthly investments.<\/p>\n At a minimum, you should invest at least 10% of your income<\/b>. But, to get a more accurate number, you should use a retirement calculator<\/a> to see if you can afford to retire. It only takes a minute to plug in your current financial vitals and your retirement goals to see if you\u2019re on track. If you need to invest more, the calculator will recommend how much you need to invest to retire on time.<\/p>\n Hopefully, your employer offers matching 401k contributions and you\u2019ve been maximizing that opportunity to make \u201cfree money.\u201d Most employers offering matching contributions match a percentage of the first 6% of your monthly salary. If you make $3,000 a month before taxes, they will might contribute $180 per month; think of it as an instant $2,160 annual raise.<\/p>\n After maximizing your 401k match, you should split your remaining monthly investments into a tax-advantaged retirement account and taxable brokerage account.<\/p>\n Splitting your investments between the two ensures you invest for retirement, but you still have immediate penalty-free access to investments in your taxable non-retirement brokerage account.<\/b><\/p>\n You will still want to keep your emergency fund<\/a> savings and additional cash savings in an interest-bearing bank account and invest money you don\u2019t plan on spending within the next two years in a taxable brokerage account. You invest the money you need a few years from now so it can appreciate faster than your bank deposits and you don\u2019t have to pay the 10% early withdrawal penalty the 401k and IRA accounts charge.<\/p>\n Because the stock market is unpredictable, remember only to invest money in your taxable account that you don\u2019t plan on withdrawing at least one year from now. Historically, the overall market yields a profit long-term, but you can lose money in the short-term.<\/p>\n For example, you can invest $1,000 today and if the market declines 10% a month from now, your investment is only worth $900 and can potentially take a year to regain the losses and begin appreciating. Volatility is why investors near retirement invest in fixed income assets so they don\u2019t have to delay retirement because of an unexpected market correction.<\/p>\n The money sitting in your bank account only earns slightly more than 1% interest at best. If your investments earn 6% annually on average, you\u2019re making six times the profit compared to keeping it at your bank.<\/p>\n The secret to becoming a millionaire<\/a> is earning more passive income than the month before. It\u2019s challenging to do this when the money in your savings account is only earning a few pennies each month. This is why it\u2019s so important to invest your extra income.<\/p>\n Any money you don\u2019t plan on spending until you retire needs to be put into your tax-advantaged retirement account. If you have a decent 401k plan with solid investment options and minimal fees, it can be easier to make all your additional retirement contributions there.<\/p>\n If not, invest any additional monthly contributions in either a Traditional IRA or Roth IRA. Open a Traditional IRA<\/a> when you want to lower your taxable income now but pay taxes on your contributions in retirement, otherwise contribute your post-tax income to a Roth IRA so your contributions grow 100% tax-free.<\/p>\n You don\u2019t have a choice where your employer hosts their 401k plan, but you can control where you keep your personal investments. It\u2019s almost always easier to keep your IRA and taxable brokerage accounts at the same brokerage.<\/p>\n<\/span>Keep Your Discretionary Spending to a Minimum<\/span><\/h2>\n
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<\/span>Invest At Least 10% of Your Income<\/span><\/h2>\n
Retirement Account vs. Non-Retirement Account Contributions<\/h3>\n
When to Invest in a Taxable Brokerage Account<\/h3>\n
When to Invest in a Retirement Account<\/h3>\n
Keep All Your Investments At One Brokerage<\/h3>\n